Reduce tax by transferring a property investment income to a spouse


Simon Misiewicz

25th July 2016

Relevant to the tax year 2018-19.

Your property tax questions answered

In this article we are going to try and answer the following questions:

  • What is a Form 17?
  • What is a declaration of trust for a property?
  • Can you sell a house with a deed of trust?
  • Does a declaration of trust need to be registered?
  • Can you be joint tenants and have a Declaration of Trust?
  • Can I transfer property income to my wife/husband?
  • Can you split rental income between spouses?

Whilst you are reading this article you may wish to read our page on the subject of “buy to let tax  for UK landlords” where we discuss all the different types of tax that you need to be aware of. Read Here for more (opens in a new tab)

What is a deed of trust?

Are you married/in a civil partnership? Do you own property investments between you? Is one person a higher rate and the other a basic rate taxpayer?

You may already be aware that you could be better off splitting your property profits in favour of the lower rate taxpayer. HMRC will always assume spouses own a 50/50 share in all property unless you tell them otherwise?

A deed of trust is a legal document that dictates the capital and revenue interests in a property. Typically couples own property as “joint tenants“, which means that the property is owned 50%/50%. The other way to own property is as “tenants in common“, which specifies a different split in ownership and profits, meaning one person can have 99% of the income and the other person receives just 1%.

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What are the benefits of a deed of trust?

Reducing property profits using a deed of trust and form 17

Splitting property profits 50/50 has a negative tax implication on couples where one partner is a higher rate taxpayer and one a basic rate taxpayer — they could pay less tax overall if all of the property income was included on the lower taxpayer’s income.

A deed of trust is, in effect, a way of making this happen. It is a legal document drafted by a solicitor that allows you to alter the shares in a property. So a lower taxpaying spouse can be classed as the one benefiting from the rental income.

Reducing Capital Gains tax using a deed of trust and form 17

If you are selling a property then you may be liable to Capital Gains Tax (CGT). As we explained in more detail in a previous article each person receives an annual CGT allowance of £11,300 before any tax is paid. If a couple own a property and it is sold then the first £22,600 is tax-free. After that the gain is taxed on investment property at 18% for basic rate tax payers and 28% for high rate tax payers.

A deed of trust may also be used to minimise CGT liabilities as you can utilise one another’s CGT annual allowances. Not only that but if done correctly you can identify the right % allocation to maximise the basic rate tax band for CGT purposes too. This is more significant if you are married and a property is in just one person’s name.

We have helped by property investors to minimise the impact of CGT using a deed of trust for many years.

So, what is new?

It was not until my tax team spoke about this with HMRC at length that we discovered that the deed of trust and form 17 needs to be accompanied for:

  • Properties already purchased in joint names
  • Properties couples buy in future under a ‘tenants in common’ structure where ownership is not 50/50

This means that every property owned by a couple will be deemed to be owned 50/50 unless you tell HMRC otherwise. Even if you buy a property as tenants in common with a split of 99/1 in favour of the lower rate taxpayer.  Apportioning the profits in the same way could mean there is a potential risk that your self assessment return may be challenged. This is because although you bought the property in the correct way, you failed to notify HMRC via the form 17.

If the couple divorce then the assets will remain 50/50 until the divorce settlement has been finalised.

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Step by step guide to implementing this strategy

It is one thing to understand the theory but it is another to implement the above successfully. That is why we have created a step by step guide:

1 – Identify whether you’d pay less tax by changing the ownership between a higher and lower rate taxpayer

2 – If so, speak with your solicitor and get them to do a deed of trust. Specify how you want the income to be split

3 – Complete a Form 17 to inform HMRC of the deed of trust

4 – Send the form 17 with a copy of the deed of trust to:

Self Assessment
HM Revenue and Customs
United Kingdom

What solicitors get wrong and do not tell you about in regard to Deeds of Trust

One set of professionals you think you should trust are solicitors. They are quite happy to take your money in exchange for a Deed of Trust. Here are some of the issues that clients have found when using solicitors to prepare a Deed of Trust, and our experience of then correcting their mistakes:

  • Solicitors using templates and do not check them. As a result, the names of the individuals or the name of the property is incorrect, voiding the whole document.
  • They do not tell you that a HMRC Form 17 declaration of income is required to ensure that property income can be reallocated. HMRC do not care that a Deed of Trust is done. If this is not done, the document becomes void and you have to start the whole process again.

Include your Form 17

You could therefore go to your solicitor and ask them to do the work. Unwittingly you leave the office thinking that everything has been sorted. Sadly, HMRC can investigate the past six years’ worth of accounts. They can backtrack and unravel all your hard work. They can put the property income back to the high-rate tax payer. If they find that you have reallocated property income based on a Deed of Trust without the submission of the Form 17 declaration of income.

Deeds of trust heartache

What amount of tax would you have to pay back if you have done a deed of trust without a Form 17? How much heartache and administration would be caused as a result of the solicitors work? The sad fact is that solicitors cannot be held responsible. They have done what was requested and that was to create a legal document called a Deed of Trust. The fact that they did not tell you or you did not know that a HMRC Form 17 declaration of income was needed to be completed is in effect your fault.

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